The US GDP Rocket
According to the second revision of the US GDP growth figures, the country’s economy grew by 4.2%. The final result exceeded the 4% market expectation and vastly outperformed last quarter’s 2.2% increase. Analysts have pointed out that the driving force behind this increase may be the rise in non-residential investments relating to intellectual property rights. Investments in this category grew by 11% in the second quarter. The last instance of comparable US GDP growth was in 2014. Neither continued interest rate hikes nor the strengthening dollar seem to be able to slow down this rapid growth, allowing Trump to enjoy the support of a booming economy. The Nasdaq rose by 1% yesterday while other US indices also experienced an approximately 0.5% increase across the board.
Currency Bomb
The economic crises of Argentina and Turkey seem to have affected investor sentiment across the globe. Even the positive economic news coming from the US was overshadowed by Argentina’s request for aid from the International Monetary Fund. Meanwhile Turkey has been unable to stop the lira’s depreciation and the country’s economy seems to have entered a recession.
Peripheral currencies may suffer the consequences of this recession. One possible victim is the Indian rupee, which has been weakening since the onset of the Turkish crisis and has reached its lowest USD exchange rate of all time. Over the course of this year the rupee weakened by over 10%, however, the speed of its decline has not yet entered the same period of acceleration that the Argentine peso and Turkish lira are in. The case of Venezuela has shown us that once a country’s currency enters hyperinflation, it can drag on several years without resolution and cause the displacement of large numbers of people. The global effects of such an occurrence in Argentina, Turkey and India would be considerable.
S&P 500
The most diverse US index has reached a record high during yesterday’s trading session. The index reached above 2900 for the first time since its creation, making the coveted 3000 price range seem more attainable than before. The S&P’s increase can largly be attributed to corporate flash reports performing well beyond market expectations and the respectable quarterly GDP growth supports the notion that it may continue for the rest of the year.
Investors do not appear particularly worried about either risks posed by a strong US dollar or the country’s ongoing trade conflict with China. So far these two factors do not appear to have a major effect on corporate results, although the corporate profit reports following yesterday’s GDP figures were surprisingly underwhelming. The profit of us companies increased by 2.4% in the second quarter. Based on the first quarter’s 8.2% result and the positive GDP data so analysts had estimated 8.6% for the second quarter. This change in profit indicates a slowing down of the economy, which could be attributed to the interest rate hikes. Regardless, the popularity of US stocks remains solid, which makes it entirely possible that next year the S&P 500 could find itself above 3000.
The current price level was not the result of a sudden surge, but rather a slow and gradual increase, suggesting a sustainable growth rate. The 200-period moving average illustrates this trend perfectly. It also serves as an indicator of where lines of support & resistance are located, since even during this years panicked sell-offs, price never closed below the 200-period moving average.
EURCAD
Today could mark an important occasion for currencies. Both Germany’s inflation and unemployment figures and Canada’s GDP data will be published today. These two news items are likely to cause significant rises in volatility for both currencies.
The movements of the Canadian dollar are in many respects similar to those of the US dollar, primarily due to the close connection of the two countries economies. The Bank of Canada has pursued a policy of aggressive interest rate hikes much like the Fed, since 2017. Since then, Canada’s base interest rate has increased by 1%, closely mirroring the Fed’s strategy. As a result the exchange rate of the CAD and the USD has remained fairly stable, which also resulted in the CAD strengthening against the euro. According to the chart there have been two textbook downwards price waves within a precisely defined trend channel. This also implies that there could likely be a third wave leading back to the 1.4470 starting point. Examining the timelines of these waves, this theoretical third wave would happen over the course of three months. Based off this premise, we may see the 1.4470 line tested some time later this year.
Sincerely,
Laszlo | Market Analyst
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